In Brief Tiny Titans is a small/micro-cap strategy developed by O'Shaugnessy in his 2006 book, quot;Predicting the Markets of Tomorrowquot;. It looks for cheap small caps with upward price momentum.Background James O'Shaughnessy is an American investor and the founder and CEO of O'Shaughnessy Asset Management, (OSAM), an asset management firm headquartered in Stamford, Connecticut. O'Shaughnessy wrote the seminal 1996 book quot;What Works on Wall Street” where he set out his renowned Cornerstone Growth and Cornerstone Value strategies, which we've discussed and modelled elsewhere. In his earlier work, O’Shaughnessy avoided micro cap strategies but, in his 2006 book, quot;Predicting the Markets of Tomorrowquot;, he argues that markets move in 20 year cycles and, because of the principle of mean reversion, the next 20 years is most likely to favour small-caps: quot;The best returns will likely come from the stocks of small-size companies, mid-size companies, large company value stocks, and shorter duration, intermediate-term bondsquot;. He also noted that tiny micro-cap stocks have several unique features that make them ideal for aggressive investors:
CriteriaTiny Titans is the most quot;aggressivequot; of his small-cap strategies. The criteria are quite simple:
Does it work? From 1951 through 2004, the strategy had a real (i.e. above inflation) average annual return of almost 19%. turning one dollar invested in 1951 into $9,734.85 by the end of 2004. In contract, a small-cap index offered a real average annual return of 10.44% per year over the same period. The downside to that kind of performance is massive volatility. The standard deviation from the average return (24.6% when not adjusted for inflation) is about 39%. This means 95% of the time the returns were between a loss of 53% and a gain of 102%. As the author notes:
Yes, the strategy has offered awesome returns over the last fifty- three years, but you must ask yourself if you could realistically stomach a loss of more than half of the value of your portfolio in a single yearquot;.
Not a strategy for widows and orphans then! O´Shaugnessy found that quarterly rebalancing instead of yearly rebalancing enhances the portfolio performance. But rebalancing too often, say every month, has a detrimental effect to performance because of the higher trading fee costs and slippage.
On Stockopedia PRO, of course! Sign up now for access to our exclusive Beta!From the Source O'Shaugnessy's most recent book, “Predicting the Markets of Tomorrow: A Contrarian Investment Strategy for the Next Twenty Years” (2006), is available on Amazon. The 2005 version of quot;What works on Wall Streetquot; is available on Amazon. It's also worth referring to his “What Works on Wall Street” website. Further Reading:
updated Feb 12, 2012
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